The Anatomy of a Law Firm Merger

As the profession consolodates with mergers and the rise of national firms, what’s the future for the legal profession?

We turn to lawyers when we have problems. But they too have their concerns, as were brought out in this BQ Breakfast Live attended by representatives of more than 40 law firms and other service organisations.

Introducing, Bryan Hoare, BQ’s managing director, noted considerable changes evident in the legal sector over the past five or six years. Phil Hourigan, director of corporate banking, North East, for RBS said RBS itself was undergoing change as it separates what will be a new bank, Williams & Glynn.

Caroline Theobald, chairing, said the legal sector reflects the general economy. What might be the challenges, opportunities and likelihood of further consolidation and mergers?

Adam Heather, executive head of DWF in Newcastle, said his firm (started in the North West in 1977) is increasingly international with offices in the UK and beyond. In recent years five mergers, one with Crutes in Newcastle, had enabled the company to grow faster into a UK Top 20 law firm.

Commercial services now comprise more than half of the workload. A hot issue for him was whether national firms can provide in the North East.

Paul Bury, manager partner, Endeavour Partnership, said his firm, providing wholly commercial services in the North East, was formed 15 years ago, essentially out of a demise at Eversheds. It also serves a major American company and specialises in global technology licensing.

“Firms in the North East can provide excellent services,” he said. “We reach other parts of the country and other parts of the world.” He’d heard it suggested the presently ageing solicitor population will mean more medium and small law firms will struggle.

Jamie Martin, managing partner, Ward Hadaway, told how Ward Hadaway had grown in Newcastle out of mergers and turnover this year will be £35m. The firm has more than 450 people, 85 partners. About 360 are in Newcastle, 60 in Leeds and 30 in Manchester. They opened at Leeds in 2008 and Manchester in 2012 because it was felt they couldn’t continue to grow in Newcastle at a rate they wanted, and growth’s very important to them.

“The big challenge, I think, for law firms going forward is how they continue to grow to meet the aspirations of their partners and staff with increasing incomes in what’s nationally a relatively static pool of fee income.”

Based extensively on Newcastle Quayside, his firm is highly committed to the North. “We are a Northern firm for national business. We’ve no aspirations to become a national firm. Our efforts are now directed towards developing our offices in Leeds and Manchester. The latter markets carry interesting and fiercely competitive challenges. We’re up against significantly larger firms. It’s a very interesting time.”

Mike Holloway, relationship director, RBS, says RBS still has a very strong appetite to lend to law firms, based on detailed analysis of their business, including strategies and financial performances. “We look at mergers wanting to be sure a projected plan to support a proposed merger properly interprets the deal’s strategic objectives. I’ve seen situations where mergers seem the strategy rather than the means towards a strategy.

“It’s important to have ensured your funding requirements, and that the debt structure properly reflects the mix of your scheme. It should incorporate good headroom – more than at pre-merger. Not everything will go as you originally planned. And how do you identify the other party’s culture before you do a deal? I’ve seen mergers run into problems, partly through cultural incompatibility.

“It’s also important to keep the bank in the loop. If further funding’s needed, it’s important the bank is on the same page as you from the outset. Also I’ve seen incidences recently where succession, particularly the issue of cost in paying back former partners, has caused a problem. There should be a more active basis for succession if you have a strategy to grow.”

Andy Poole, legal sector partner, Armstrong Watson (one of the top 30 UK firms of accountants) says that besides normal accountancy tasks his firm acts as strategic consultants to improve law firms’ cashflow, improve their profitability and help them implement strategic changes in structure. “We’ve been inundated with mergers and have 12 we’re advising on right now. Within the past four weeks we’ve had four more enquiries across the UK. They might turn into mergers.”

Firms are asking advice concerning efficiency changes and how they manage themselves – but also the structure of the business, limited company, partnerships and more hybrid structures. His firm also puts training programmes into law firms.

“Succession is a big issue, also personal injury. Legal changes in that sector recently are creating huge upheaval.“ Whiplash claims may become banned. Small claims are changing too.

Peter Scott, still a practising solicitor and now in a consultancy role, tries to help law firms become competitive. “If you cease to be competitive you fall by the wayside. You die. You must be able to give clients what they want, provide value for money, and services where and when they want them. That brings a lot of things on: performance, management, and rewards. It means being competitive in recruitment and retaining the best people. There’s also a fear of US firms in a growing global context.

“Mergers are one aspect of a far bigger picture, that of change. Being competitive is managing change to streamline, in use of IT for example.”

He was a managing partner with Eversheds in London (1995-2000). Several firms melded into one and it financially integrated. “We had a vision. Any law firm, small or large, needs a vision; what does it want to make of itself? We wanted to be not just large but able also to look after clients whatever services they wanted, wherever and whenever, in the best possible way. What are the drivers behind a merger? If you get that right you’re ok.”

Adam Heather said Eversheds discontinued in Newcastle because it was felt to be not remunerative enough. “DWF is a national law firm and national firms can thrive in the North East. But it’s difficult. Prices and profits that national law firms impose don’t allow you to price yourself and give value for money.

DWF allows us to do that because we have built autonomy around that. We came in as a national firm focusing on the region, as opposed to a national firm that came in focusing outward.”

Jamie Martin: “The market speaks for itself. With deepest respect Eversheds office here has not thrived and I think that says it all. We went outside the region feeling we’d be unable to continue to grow the firm in Newcastle with a single site. We were achieving 16% average growth per annum which looked unlikely to continue. The only option was to look outside also.”

Paul Bury pointed out that Eversheds and Dickinson Dees had both had a Teesside office. On becoming national, they closed the Teesside office, effectively withdrawing their presence from Teesside. “We’re very comfortable where our only office is based.” It benefits from the ‘North Shore’ effect whereby, a study shows, rental and employment costs in the North are 30% less than in the South. “There is opportunity for Northern firms to extend their operations. With present technology they don’t need geographical presence.

Peter Scott: “I think there are misconceptions about national firms and their structure. At Eversheds we were a federation, a number of firms operating together but with separate managements although we operated as one putting a percentage of our turnover into a common pot. That worked at the time, but there were people who felt it had to be controlled and managed differently. If you operate in markets that structure differently you structure yourself accordingly. I still believe there is room for more national firms in the regions.”

Law firms have brands and people buy brands because they know what they’re getting.

Andy Poole: “How can North East firms compete with national players? I think they’re well placed. Cost base is important and leads to North Shoring. Many firms are looking into this, not just national firms seeking a lower cost base but some national firms that may want to deliver services through a regional associate.

To team up with a national law firm that hasn’t an office here you’d need to demonstrate efficiency and go through a lean management process review to see whether you fit in. Businesses are now well prepared to accept remote service because of technology.

Mike Holloway: “I look after one or two firms Northern based that are doing work they generated in London and are doing it far more cost efficiently from their offices in the North.

Caroline Theobald asked Paul Bury to elaborate on ageing.

Paul Bury: “Ageing is of concern to the profession as a whole. Succession planning should be embedded into every firm from inception. Some solicitors I grew up with are struggling.” He instanced pressures on fees. “They’re stuck in generations old general practices, in their 60s with no-one behind them. It gives opportunity for regional firms to take over or hire laterally.”

Andy Poole: “We’ve gone through a period where profits dipped, partner promotions were made and then we’ve come to a period where capital accounts increased. Partners can’t all retire at once and haven’t anyone coming through. Even those identified may not want to risk equity partnership.”

Many firms are asking how will capital accounts be repaid? Coupling that with the need of capital indemnity required, and often putting two firms together in those circumstances will worsen matters.

Merger is an answer but must be done in a particular way, with gaps plugged not only in age but services also. “Often when it’s a takeover rescue the value to the selling party isn’t as high as retiring partners would wish.”

Jamie Martin: “For us it’s about investing in our people, younger partners, to ensure they’re ready, giving them scope to develop. Over a significant period it has been about developing our graduate training, and training them to be Ward Hadaway people. Inevitably you have to do some lateral hiring, and largely that’s been successful. But we prefer to create our own succession through developing mid-tier partners who joined as trainees.”

Paul Bury: During the recession it was pleasing that trainees we couldn’t keep on ended up with leading firms within the North East. I think our salvation is in the hands of people we train and bring along. We try hard to break down barriers between qualified and unqualified staff and get everyone engaged. We can’t all be partners, but you needn’t be a partner to make a valuable contribution.

Jamie Martin: “Lateral hires may come in with other cultures. We prefer them maybe to bring in new ideas. But lawyers are independently minded and may not necessarily respond well to being told to do things in a particular way. Building a culture is difficult, and long term.“

Peter Scott: “Getting people to a consensus when change is necessary is the first thing a firm has to do. In mergers we need to learn from each other. You need change. In the stress of change in mergers, instead of seeing it as your enemy, manage it - make it your greatest ally. Consolidation must happen in this market place where 85% of law firms in England and Wales have four or fewer partners.”

Andy Poole: “You’ll never get a perfect fit in a merger. The key is to align. That means understanding each other’s cultures and building round them.”